UNITED

STATES

SECURITIES

AND EXCHANGE COMMISSION

Washington,

D.C. 20549

FORM

10-K

(Mark

One)

Commission

File number 001-34839

Electromed, Inc.

(Exact Name of Registrant as Specified in its Charter)

(State or other jurisdiction of (IRS Employer

incorporation or organization) Identification No.)

500

Sixth Avenue NW, New Prague, MN56071

(Address

of principal executive offices, including zip code)

(Registrant’s telephone number, including area code)

Securities

registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol(s) Name of each exchange on which registered

Common Stock, par value $0.01 per share ELMD NYSE American

Securities

registered pursuant to Section 12(g) of the Act: None

Indicate

by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No

☑

Indicate

by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑

Indicate

by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities

Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such

reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate

by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant

to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that

the registrant was required to submit such files). Yes ☑ No ☐

Indicate

by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting

company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”,

“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☐

Non-accelerated filer ☐ Smaller reporting company ☑ Emerging growth company ☐

an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for

complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate

by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness

of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered

public accounting firm that prepared or issued its audit report. ☐

securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the

registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate

by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation

received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).

☐

Indicate

by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑

The

aggregate market value of the common stock held by non-affiliates of the registrant as of December 31, 2022 was approximately $80,606,901based upon the closing price of the registrant’s

common stock, as reported on the NYSE American, on such date.

There

were 8,555,238 shares of the registrant’s common stock outstanding as of August 15, 2023.

DOCUMENTS

INCORPORATED BY REFERENCE

Portions

of the Definitive Proxy Statement for the registrant’s Fiscal 2024 Annual Meeting of Shareholders, to be filed within 120

days of June 30, 2023, are incorporated by reference into Part III of this Annual Report on Form 10-K.

Electromed,

Inc.

Index

to Annual Report on Form 10-K

PART I 1

Item 1. Business 1

Item 1A. Risk Factors 13

Item 1B. Unresolved Staff Comments 13

Item 2. Properties 13

Item 3. Legal Proceedings 13

Item 4. Mine Safety Disclosures 13

Item 6. [Reserved] 14

Item 7A. Quantitative and Qualitative Disclosures About Market Risk 21

Item 8. Financial Statements and Supplementary Data F-1

Item 9A. Controls and Procedures 22

Item 9B. Other Information 22

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 23

PART III 23

Item 10. Directors, Executive Officers and Corporate Governance 23

Item 11. Executive Compensation 23

Item 14. Principal Accountant Fees and Services 24

Item 15. Exhibits and Financial Statement Schedules 24

INFORMATION

REGARDING FORWARD-LOOKING STATEMENTS

Statements

contained in this Annual Report on Form 10-K that are not statements of historical fact should be considered forward-looking statements

within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of

the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward- looking statements include, but are

not limited to, statements regarding: the expected impact of the COVID-19 pandemic on our business; our business strategy, including

our intended level of investment in research and development and marketing activities; our expectations with respect to earnings,

gross margins and sales growth, industry relationships, marketing strategies and international sales; estimated sizes of markets

into which our products are or may be sold; our business strengths and competitive advantages; our ability to grow additional

sales distribution channels; our intent to retain any earnings for use in operations rather than paying dividends; our expectation

that our products will continue to qualify for reimbursement and payment under government and private insurance programs; our

intellectual property plans and practices; the expected impact of applicable regulations on our business; our beliefs about our

manufacturing processes; our expectations and beliefs with respect to our employees and our relationships with them; our belief

that our current facilities are adequate to support our growth plans; our expectations with respect to ongoing compliance with

the terms of our credit facility; our expectations regarding the ongoing availability of credit and our ability to renew our line

of credit; enhancements to our products and services; expected excise tax exemption for the SmartVest System; and our anticipated

revenues, expenses, capital requirements and liquidity. Words such as “anticipate,” “believe,” “continue,”

“could,” “estimate,” “expect,” “intend,” “may,” “ongoing,”

“plan,” “potential,” “project,” “goal,” “target,” “should,”

“will,” “would,” and similar expressions, including the negative of these terms, are intended to identify

forward-looking statements but are not the exclusive means of identifying such statements. Although we believe these forward-looking

statements are reasonable, they involve risks and uncertainties that may cause actual results to differ materially from those

projected by such statements. Such statements involve known and unknown risks, uncertainties and other factors that may cause

our actual results or our industry’s actual results, levels of activity, performance, or achievements to be materially different

from the information expressed or implied by the forward-looking statements.

Factors

that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited

to, the following:

● adverse changes to state and federal health care regulations;

● entry of new competitors including new drug or pharmaceutical discoveries;

● adverse economic and business conditions or intense competition;

● the risks associated with our planned salesforce expansion;

● wage inflation;

● technical problems with our research and products;

● changes affecting the medical device industry;

● our ability to protect and expand our intellectual property portfolio.

This

list of factors is not exhaustive, however, and these or other factors, many of which are outside of our control, could have a

material adverse effect on us and our results of operations. Therefore, you should consider these risk factors with caution and

form your own critical and independent conclusions about the likely effect of these risk factors on our future performance. Forward-looking

statements speak only as of the date on which the statements are made, and we undertake no obligation, and expressly disclaim

any such obligation, to update any forward-looking statement for any reason other than as required by law, even if new information

becomes available or other events occur in the future. You should carefully review the disclosures and the risk factors described

in this and other documents we file from time to time with the Securities and Exchange Commission (the “SEC”). All

forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the

cautionary statements set forth herein.

iii

PART

Item 1. Business.

Overview

Electromed,

Inc. (“we,” “our,” “us,” “Electromed” or the “Company”) develops,

manufactures, markets and sells innovative products that provide airway clearance therapy, including the SmartVest®

Airway Clearance System (“SmartVest System”) and related products, to patients with compromised pulmonary function

with a commitment to excellence and compassionate service. Our goal is to make High Frequency Chest Wall Oscillation (“HFCWO”)

treatments as effective, convenient, and comfortable as possible, so our patients can breathe easier and live better with improved

respiratory function and fewer exacerbations.

employ a direct-to-patient and provider model, through which we obtain patient referrals from clinicians, manage insurance claims

on behalf of our patients, and deliver the SmartVest System to patients, training them on proper use in their homes. This model

allows us to directly approach patients and clinicians, whereby we disintermediate the traditional durable medical equipment (“DME”)

channel and capture both the manufacturer and distributor margins. We also sell our products in the acute care setting for patients

in a post-surgical or intensive care unit, or who were admitted for a lung infection brought on by compromised airway clearance.

Electromed was incorporated in Minnesota in 1992. Our common stock is listed on the NYSE American under the ticker symbol “ELMD.”

The

SmartVest System features a programmable air pulse generator, a therapy garment worn over the upper body and a connecting hose,

which together provide safe, comfortable, and effective airway clearance therapy. The SmartVest System generates HFCWO, an airway

clearance therapy. One factor of respiratory health is the ability to clear secretions from airways. Impaired airway clearance,

when mucus cannot be expectorated, may result in labored breathing and/or inflammatory and immune systems boosting mucus production

that invites bacteria trapped in stagnant secretions to cause infections. Studies show that HFCWO therapy is as effective an airway

clearance method for patients who have compromised pulmonary function as traditional chest physical therapy (“CPT”)

administered by a respiratory therapist.1 However, HFCWO can be self-administered, relieving a caregiver of participation

in the therapy, and eliminating the attendant cost of an in-home care provider. We believe that HFCWO treatments are cost-effective

primarily because they reduce a patient’s risk of respiratory infections and other secondary complications that are associated

with impaired airway clearance and often result in costly hospital visits and repeated antibiotic use.

The

SmartVest System is designed for patient comfort and ease of use which promotes adherence to prescribed treatment schedules, leading

to improved airway clearance, patient outcomes and quality of life, and a reduction in healthcare utilization. We offer a broad

range of garments, referred to as vests and wraps, in sizes for children and adults that allow for tailored fit. User-friendly

controls allow patients to administer their daily therapy with minimal or no assistance. Our direct product support services provide

patient and clinician education, training, and follow-up to ensure that the product is integrated into each patient’s daily

treatment regimen. Additionally, our reimbursement department assures we are working on behalf of the patient by processing their

physician paperwork, providing clinical support and billing the applicable insurance provider. We believe that the advantages

of the SmartVest System and the Company’s customer services to the patient include:

● improved quality of life;

● reduction in healthcare utilization;

● independence from a dedicated caregiver;

● consistent treatments at home;

● improved comfort during therapy; and

1Nicolini

A, et al. Effectiveness of treatment with high-frequency chest wall oscillation in patients with bronchiectasis. BMC Pulmonary

Medicine. 2013;13(21).

Our

Products

Since

2000, we have marketed the SmartVest System and its predecessor products to patients suffering from bronchiectasis, cystic fibrosis,

and neuromuscular conditions such as cerebral palsy and amyotrophic lateral sclerosis (“ALS”). Our products are sold

into the home health care market and the acute care setting for patients in a post-surgical or intensive care unit, or who were

admitted for a lung infection brought on by compromised airway clearance. Accordingly, our sales points of contact include adult

pulmonology clinics, cystic fibrosis centers, neuromuscular clinics and hospitals.

have received clearance from the U.S. Food and Drug Administration (“FDA”) to market the SmartVest System to promote

airway clearance and improve bronchial drainage. In addition, Electromed is certified to apply the Conformité Européenne

(“European Conformity” or “CE”) marking for HFCWO device sales in all European Union member countries

and approved for HFCWO device sales in other, select international countries. The SmartVest System is available only with a physician’s

prescription.

The

SmartVest System is currently available in two models, The SmartVest SQL® and SmartVest Clearway®–

which are sold into home care and hospital markets. In November 2022, we announced the introduction of SmartVest Clearway®,

our next generation HFCWO system designed around an enhanced patient experience and modern design. We will continue to support

and service earlier SmartVest models pursuant to the applicable product warranty. As part of our growth strategies, we periodically

evaluate opportunities involving products and services, especially those that may provide value to the respiratory homecare and

institutional market.

The

SmartVest Clearway System

The

SmartVest Clearway System consists of an inflatable therapy garment, a programmable air pulse generator and a patented single-hose

that delivers air pulses from the generator to the garment to create oscillatory pressure on the chest wall. The SmartVest Clearway

is designed for maximum comfort and lifestyle convenience, so patients can readily fit therapy into their daily routines. The

SmartVest Clearway was designed with the patient experience in mind continuing our history of offering the smallest, lightest

weight generator on the market and introduces an intuitive touch screen to simplify use. The enhanced features make it easier

to use and enable greater patient freedom in completing therapy.

SmartVest

Connect

June 2017, we launched SmartVest Connect® wireless technology, a personalized HFCWO therapy management portal for

patients with compromised pulmonary function. In March 2020, we launched the SmartVest Connect app for both the iOS and Android

operating systems. The SmartVest Connect app securely connects to the SmartVest System through BluetoothTM technology. This

interface allows patients and healthcare teams to track therapy in real-time and collaborate on care decisions to improve therapy

adherence and patient outcomes.

Other

Products

market the Single Patient Use (“SPU”) SmartVest and SmartVest Wrap® to health care providers in the

acute care setting. Hospitals issue the SPU SmartVest or SmartVest Wrap to an individual patient for managing airway clearance

while inpatient. Both SPU products provide full coverage oscillation and facilitate continuity of care when the SmartVest System

is prescribed for patients with a chronic condition upon discharge for use in the home.

Our

Market

estimate the total served U.S. market for HFCWO is approximately $250 million in 2022 growing at a 9% compound annual growth rate

based on independent third-party market research. We believe the market for HFCWO is under recognized and underdiagnosed and is

continuing to expand due to an aging population, higher incidence of chronic lung disease, growing awareness by physicians of

diseases and conditions for which patients can benefit from using HFCWO therapy, and treatments moving to lower cost home care

settings. Indications for when HFCWO may be prescribed are not specific to any one disease. A physician may elect to prescribe

HFCWO when such individual believes the patient will benefit from improved airway clearance and external chest manipulation is

the treatment of choice to enhance mucus transport and improve bronchial drainage.

The

SmartVest System is primarily prescribed for patients with bronchiectasis, cystic fibrosis, and neuromuscular conditions such

as cerebral palsy and ALS. We believe that bronchiectasis represents the fastest growing diagnostic category and greatest potential

for HFCWO growth in the United States exhibiting an 8.7% increase in patients diagnosed between 2000 and 20079. Bronchiectasis

is an irreversible, chronic lung condition characterized by enlarged and permanently damaged bronchi. The condition is associated

with recurrent lower respiratory infections, inflammation, reduction in pulmonary function, impaired respiratory secretion clearance,

increased hospitalizations and medication use, and increased morbidity and mortality.

are driven to make life’s important moments possible, one breath at a time, by leading the HFCWO therapy market in clinical

evidence that supports the therapeutic imperative of clearing excess mucus from the lungs. Electromed continues to add to the

body of evidence in support of HFCWO with multiple published clinical outcome studies demonstrating a significant improvement

in quality of life and reduction in exacerbation rates, hospitalizations, emergency department visits, and antibiotic prescriptions

in bronchiectasis patients using the SmartVest System. This includes a 2022 publication in the American Journal of Respiratory

and Critical Care Medicine reviewing outcomes among non-cystic fibrosis bronchiectasis patients with HFCWO Therapy2-6. In

addition, we designed and ran a quality-of-life study for COPD patients using SmartVest, which was shared at the 2023 American

Thoracic Society International Conference and published in American Journal of Respiratory and Critical Care Medicine. The study’s

results demonstrated statistically significant favorable responses to HFCWO as add on therapy for patients with a primary diagnosis

of COPD. We have also shared data from our bronchiectasis quality of life trial at the 2023 World Bronchiectasis and NTM Conference

highlight effects of HFCWO on clinical symptoms of patients with bronchiectasis Generating additional clinical evidence to further

support the SmartVest System as a preferred treatment for bronchiectasis patients will remain a focus in fiscal 2024.

believe that bronchiectasis is under recognized and underdiagnosed but is experiencing a surge in clinical interest and awareness,

including the relationship to COPD, commonly referred to as bronchiectasis COPD overlap syndrome. The overlap of bronchiectasis

and COPD increases exacerbations and hospitalizations, reduces pulmonary function, and increases mortality. Several recent studies

have estimated prevalence of bronchiectasis, which we believe are helpful for estimating a range of the overall market size.

These

studies indicate a wide range of potential prevalence of bronchiectasis patients in the United States. We also believe that it

is difficult to estimate from these studies which patients will need or benefit from HFCWO. Internal company estimates derived

from 2020 analysis of the IQVIA PharMetrics Plus database, one of the largest US health plan databases of adjudicated integrated

medical and pharmacy claims, indicate a 15% to 20% penetration of HFCWO within the diagnosed Bronchiectasis population15.

By conservatively assessing the market size in relation to the clinical studies cited above, we calculate that current HFCWO adoption

may account for only 100,000 patients of the 500,000 to 600,000 currently diagnosed and treatable patients (see Figure 1 below).

We believe that bronchiectasis is underdiagnosed in the U.S. based on clinical study and epidemiology evidence with an even greater

number of patients that could potentially benefit from diagnosis and treatment. We believe that HFCWO is under prescribed for

bronchiectasis patients resulting in a large, underpenetrated US market opportunity and growth potential for HFCWO therapy.

2Sievert

C, et al. Using High Frequency Chest Wall Oscillation in a Bronchiectasis Patient Population: An Outcomes-Based Case Review. Respiratory

Therapy Journal. 2016;11(4): 34–38.

3Sievert

C, et al. Cost-Effective Analysis of Using High Frequency Chest Wall Oscillation (HFCWO) in Patients with Non-Cystic Fibrosis

Bronchiectasis. Respiratory Therapy Journal. 2017;12(1): 45–49.

4Sievert

C, et al. Incidence of Bronchiectasis-Related Exacerbation Rates After High Frequency Chest Wall Oscillation (HFCWO) Treatment

— A Longitudinal Outcome-Based Study. Respiratory Therapy Journal. 2018;13(2): 38–41.

5Powner

J, et al. Employment of an algorithm of care including chest physiotherapy results in reduced hospitalizations and stability of

lung function in bronchiectasis. BMC Pulmonary Medicine. 2019;19(82).

DeKoven M, Mandia K, DeFabis N, Chen J, Ruscio A. Patient Characteristics, Healthcare Resource Utilization And Outcomes

Among Non-Cystic Fibrosis Bronchiectasis Patients With High Frequency Chest Wall Oscillation (HFCWO) Therapy. American Journal

of Respiratory and Critical Care Medicine. 2022. Vol 205:A3090

7Weycker

D, Hansen G, Seifer F. Prevalence and incidence of noncystic fibrosis bronchiectasis among US adults in 2013. Chronic Respiratory

Disease. 2017; 14(4):377-384.

8Henkle

E, et al. Characteristics and Health-care Utilization History of Patients with Bronchiectasis in US Medicare Enrollees With Prescription

Drug Plans, 2006 to 2014. Chest. 2018;154(6), 1311–1320.

9Seitz

A, et al. Trends in Bronchiectasis Among Medicare Beneficiaries in the United States, 2000 to 2007. Chest. 2012;142(2),

432–439.

10Aksamit

T, et al. Bronchiectasis Research Registry C. Adult Patients With Bronchiectasis: A First Look at the US Bronchiectasis Research

Registry. Chest. 2017;151:982-92.

11Patel

I.S., et al. Bronchiectasis, exacerbation indices, and inflammation in chronic obstructive pulmonary disease. Am J Respir Crit

Care Med. 2004;170:400-7.

12O’Brien

C, et al. Physiological and radiological characterization of patients diagnosed with chronic obstructive pulmonary disease in

primary care. Thorax. 2000;55:635-42.

13Bafadhel

M, et al. The role of CT scanning in multidimensional phenotyping of COPD. Chest. 2011;140:634-42.

14Chalmers

J. and Sethi S. Raising awareness of bronchiectasis in primary care: overview of diagnosis and management strategies in adults.

NPJ Prim Care Respir Med. 2017;27:18.

Internal company estimates derived from IQVIA 2018 PharMetrics Plus Database

M. Bruner, C. Bazan, B. Liu, C. Marion, K.S. Skarvan, L. Edwards, G. Solomon. Effects of High Frequency Chest Wall Oscillation

(HFCWO) on Clinical Symptoms in COPD. American Journal of Respiratory and Critical Care Medicine. 2023. Vol 207:C96

C. Cheng, M. Bruner, C. Bazan, B. Liu, C. Marion, L. Edwards, G. Solomon. Effects of High Frequency Chest Wall Oscillation

(HFCWO) on Quality of Life in Bronchiectasis. 6th World Bronchiectasis & NTM Conference. 2023. Poster Abstract 310-B

Estimated

HFCWO Market Opportunity - Bronchiectasis Patients (U.S.) – Figure 1

The

heightened awareness of bronchiectasis speaks to the growing body of clinical evidence supporting treatments to improve symptoms

and manage disease progression.

Marketing,

Sales and Distribution

Our

sales and marketing efforts are focused on driving adoption of our products and services with physicians, clinicians, patients,

and third-party payers and building market awareness to the benefits of HFCWO for treatment of bronchiectasis. Because the sale

of the SmartVest System requires a physician’s prescription, we market to physicians and health care providers as well as

directly to patients. Most of our revenue comes from domestic homecare sales through a physician referral model. We have established

our own domestic sales force and support network, which we believe is able to provide superior education, support, and training

to our customers.

Our

direct U.S. sales force works with physicians and clinicians, primarily pulmonologists, in defined territories to help them understand

our products and services and the value they provide to their respective patients. As of June 30, 2023, we had 55 field sales

employees, including six regional sales managers, 46 clinical area managers (“CAMs”) and three clinical educators.

We also have developed a network of approximately 170 respiratory therapists and health care professionals across the U.S. to

assist with in-home SmartVest System patient training on a non-exclusive, independent contractor basis. These independent contractors

are credentialed by the National Board for Respiratory Care as either Certified Respiratory Therapists or Registered Respiratory

Therapists and provide national coverage to an internal team of Registered Respiratory Therapists dedicated to supporting SmartVest

patients. Additionally, Electromed employs a team of reimbursement specialists dedicated to managing insurance and payer relations

and supporting prescribers and patients in navigating financial considerations. The availability of reimbursement is an important

consideration for health care professionals and patients. Because our product has an assigned Healthcare Common Procedure Coding

System (“HCPCS”) code, a claim can be billed for reimbursement using that code. We must demonstrate the effectiveness

of our products to public and private insurance providers. The availability of reimbursement exists primarily due to an established

HCPCS code for HFCWO. A HCPCS code is assigned to services and products by the Centers for Medicare and Medicaid Services (“CMS”).

the $47.6 million of our revenue derived from the U.S. in fiscal 2023, approximately 92% represented home care and 4% represented

hospital sales. We expect to achieve future sales, earnings, and overall market share growth through a continued focus on product

innovation, differentiation and improved patient experiences and outcomes in the home care segment. We believe that our position

in the market, direct sales team and a dedication to advancing education on HFCWO awareness positions us to drive market awareness

and growth to the benefits of HFCWO in treatment of bronchiectasis. We believe that dedicated service to our providers and patients

is a key component of achieving future sales. Providers seek companies that are easy to work with, are responsive and care for

their patients as an extension of their practices.

generate sales interest through multiple channels that include visits to pulmonology clinics and medical centers, participation

in medical conferences, maintenance of industry contacts to increase the visibility and acceptance of our products by physicians

and health care professionals, support of industry events such as the Cystic Fibrosis Foundation World Bronchiectasis Day and

American Lung Association Fight for Air Climb, as well as through a focus on increasing patients by word of mouth and traffic

to our website and social media channels. We continue to evaluate opportunities to offer the SmartVest System through selected

Home Medical Equipment (“HME”) distributors. We maintain agreements with a limited number of HME distributors to distribute

and sell the SmartVest System in the United States home care market. We expect to continue our direct sales channel as our primary

homecare revenue source.

International

Marketing

Approximately

1% of our net revenues were from sales outside of the U.S. in both of our fiscal 2023 and our fiscal year ended June 30, 2022

(“fiscal 2022”), respectively. We sell our products outside of the U.S. primarily through independent distributors

specializing in respiratory products. Through June 30, 2023, most of our distributors operated in exclusive territories. Our principal

distributors are located in Europe, the Arab states of the Persian Gulf, Southeast Asia, South America and Central America. Units

are sold at a fixed contract price with payments made directly from the distributor, rather than being tied to reimbursement rates

of a patient’s insurance provider as is the case for domestic sales. Our sales strategy outside of the U.S. is to maintain

our current distributors with less emphasis on contracting with new distributors.

Third-Party

Reimbursement

the U.S., individuals who use the SmartVest System generally rely on third-party payers, including private payers and governmental

payers such as Medicare and Medicaid, to cover and reimburse all or part of the cost of using the SmartVest System. Our home care

revenue comes from reimbursement from commercial payers, Medicare, Medicaid, Veterans Affairs and direct patient payments. Reimbursement

for HFCWO therapy and the SmartVest System varies among public and private insurance providers.

key strategy to grow sales is achieving world class customer service and support for our patients and clinicians and increasing

the number of covered lives across a broad payer market. We do this with an established and effective reimbursement department

working on behalf of the patient by processing physician paperwork, seeking insurance authorization and processing claims. The

skill and knowledge gained and offered by our reimbursement department is an important factor in building our revenue and serving

patients’ financial interests. Our payment terms generally allow patients to acquire the SmartVest System over a period

of one to 15 months, which is consistent with reimbursement procedures followed by Medicare and other third parties. The payment

amount we receive for any single referral may vary based on several factors, including Medicare and third-party reimbursement

processes and policies. The reimbursement department includes the payer relations function working directly with all payer types

to increase the covered lives for the SmartVest System with national and regional private insurers and applicable state and federal

government entities as well as to maintain the current licenses with state and federal government and payer contracts.

Our

SmartVest System is reimbursed under HCPCS code E0483. Currently, the Medicare total allowable amount of reimbursement for this

billing code is approximately $15,000. The allowed amount for state Medicaid programs ranges from approximately $8,000 to $15,000,

which is similar to commercial payers. Actual reimbursement from third-party payers can vary and can be significantly less than

the full allowable amount. Deductions from the allowable amount, such as co-payments, deductibles and/or maximums on durable medical

equipment, decrease the reimbursement received from the third-party payer. Collecting a full allowable amount depends on our ability

to obtain reimbursement from the patient’s secondary and/or supplemental insurance if the patient has additional coverage,

or our ability to collect amounts from individual patients.

Most

patients can qualify for reimbursement and payment from Medicare, Medicaid, private insurance or combinations of the foregoing.

Our sales continue to be dependent, in part, on the availability of coverage and reimbursement from third-party payers, even though

our devices have been cleared for marketing by the FDA. The way reimbursement is sought and obtained varies based upon the type

of payer involved and the setting in which the procedure is furnished.

Research

and Development

Our

research and development (“R&D”) capabilities consist of full-time engineering staff and several consultants.

We periodically engage consultants and contract engineering employees to supplement our development initiatives. Our team has

a demonstrated record of developing new products that receive the appropriate product approvals and regulatory clearances around

the world as demonstrated by the FDA 510(k) clearance for the SmartVest Clearway Airway Clearance System received November 2022.

During

fiscal 2023 and 2022, we incurred R&D expenses of approximately $916,000 and $1,356,000, or 1.9% and 3.3% of our net revenues,

respectively. As a percentage of sales, we expect spending on R&D expenses to remain within a range of 1-2% of net revenues

for fiscal 2024.

Intellectual

Property

of June 30, 2023, we held 12 United States and 41 foreign-issued patents covering the SmartVest System and its underlying technology

and had 9 pending United States and foreign patent applications. These patents and patent applications offer coverage in the field

of air pressure pulse delivery to a human in support of airway clearance.

generally pursue patent protection for patentable subject matter in our proprietary devices in foreign countries that we have

identified as key markets for our products. These markets include the European Union, Japan, and other countries.

also have received 13 U.S. and 111 foreign trademark and service mark registrations.

Manufacturing

Our

headquarters in New Prague, Minnesota includes a dedicated manufacturing and engineering facility of more than 14,000 square feet,

and we are certified on an annual basis to be compliant with International Organization for Standardization (“ISO”)

13485 quality system standards. Our site has been audited regularly by the FDA and ISO, in accordance with their practices, and

we maintain our operations in a manner consistent with their requirements for a medical device manufacturer. While components

are outsourced to meet our detailed specifications, each SmartVest System is assembled, tested, and approved for final shipment

at our manufacturing site in New Prague, consistent with FDA, Underwriters Laboratory, and ISO standards. Many of our strategic

suppliers are located within 100 miles of our headquarters, which enables us to closely monitor our component supply chain. We

maintain established inventory levels for critical components and finished goods to assure continuity of supply. During fiscal

2022 and 2023, we experienced longer lead times for critical electronic components related to worldwide supply shortages due to

COVID-19 and the related U.S. and global economic recovery.

Product

Warranties

provide a warranty on the SmartVest System that covers the cost of replacement parts and labor, or a new SmartVest System in the

event we determine a full replacement is necessary. For each homecare SmartVest System initially purchased and currently located

in the U.S. and Canada, we provide a lifetime warranty to the individual patient for whom the SmartVest System is prescribed.

For sales to institutions and HME distributors within the U.S., and for all international sales, except Canadian home care, we

provide a three-year warranty.

Competition

The

original HFCWO technology was licensed to American Biosystems, Inc. (formerly Hill-Rom Holdings, Inc., now part of Baxter International

Inc.) (“Baxter”), which, until the introduction of our original MedPulse Respiratory Vest System® in

2000, was the only manufacturer of a product with HFCWO technology cleared for market by the FDA (Hill Rom’s The Vest®

Airway Clearance System). Respiratory Technologies, Inc. (formerly RespirTech, now part of Koninklijke Phillips N.V.) (“Philips”)

received FDA clearance to market their HFCWO product, the inCourage® Airway Clearance Therapy in 2005. Both Baxter

and Philips employ a direct-to-patient model, with Philips additionally offering its HFCWO device through selected DME distributors.

The

AffloVest® from Tactile Systems Technology Inc. (“Tactile Medical”) also participates in the same market

as our SmartVest System. Tactile Medical primarily sells its device through DME companies who distribute home care medical devices

and supplies.

Alternative

products for administering pulmonary therapy include: Positive Expiratory Pressure, Intrapulmonary Percussive Ventilation, CPT

and breathing techniques. Physicians may prescribe some or all of these devices and techniques, depending upon each patient’s

health status, severity of disease, compliance, or personal preference.

Key

drivers of HFCWO product sales continue to be improved quality of life through documented clinical outcomes and reduction in healthcare

costs through resource utilization evidence. Technology innovations and enhancements to the patient experience such as size, weight

of the generator, and optimized user interaction increase product reputation and patient satisfaction. We believe we distinguish

ourselves in these areas with competitive advantages over alternative treatments ultimately improving the patient comfort, ease

of use, and the effectiveness of HFCWO treatment. Because HFCWO is not “technique dependent,” as compared to most

other alternative pulmonary therapy products, therapy remains consistent and controlled for the duration of treatment.

Governmental

Regulation

Medicare

and Medicaid

Recent

government and private sector initiatives in the U.S. and foreign countries aim at limiting the growth of health care costs including:

price regulation, competitive pricing, coverage and payment policies, comparative effectiveness of therapies, technology assessments,

and managed-care arrangements. These initiatives are causing the marketplace to put increased emphasis on the delivery of more

cost-effective medical devices that result in better clinical outcomes. Government programs, including Medicare and Medicaid,

have attempted to control costs by limiting the amount of reimbursement the program will pay for procedures or treatments, restricting

coverage for certain products or services, and implementing other mechanisms designed to constrain utilization and contain costs.

Many private insurance programs look to Medicare as a guide in setting coverage policies and payment amounts. These initiatives

have created an increasing level of price sensitivity among our customers.

Home

Medical Equipment Licensing

Although

we do not fall under competitive bidding for Medicare, we often must satisfy the same licensing requirements as other DME providers

that qualify for competitive bidding. In response to out-of-state businesses winning the competitive bidding process, which had

a significant impact on small local DME businesses, many states have enacted regulations that require a DME provider to have an

in-state business presence, specifically through state HME licensing boards or through state Medicaid programs. In order to do

business with any patients in the state or to be a provider for the state Medicaid program, a DME provider must have an in-state

presence. In addition to Minnesota, the location of our corporate headquarters, we have a licensed in-state presence in three

other states. We also maintain an in-state presence in California to meet their state Medicaid requirements. In-state presence

requirements vary from state to state, but generally require a physical location that is staffed and open during regular business

hours. We are licensed to do business in all states except for Alaska and Hawaii.

Product

Regulations

Our

medical devices are subject to regulation by numerous government agencies, including the FDA and comparable foreign regulatory

agencies. To varying degrees, each of these agencies requires us to comply with laws and regulations governing the development,

testing, manufacturing, labeling, marketing, and distribution of our medical devices, and compliance with these laws and regulations

entails significant costs for us. Our regulatory and quality assurance departments provide detailed oversight in their areas of

responsibility to support required clearances and approvals to market our products.

addition to the clearances and approvals discussed below, we obtained ISO 13485 certification in January 2005 and receive annual

certification of our compliance to the current ISO quality standards.

FDA

Requirements

have received clearance from the FDA to market our products, including the SmartVest System. We may be required to obtain additional

FDA clearance before marketing a new or modified product in the U.S., either through the 510(k)-clearance process or the more

complex premarket approval process. The process may be time consuming and expensive, particularly if human clinical trials are

required. Failure to obtain such clearances or approvals could adversely affect our ability to grow our business.

Continuing

Product Regulation

addition to its approval processes for new products, the FDA may require testing and post-market surveillance programs to monitor

the safety and effectiveness of previously cleared products that have been commercialized and may prevent or limit further marketing

of products based on the results of post-mark surveillance results. At any time after marketing clearance of a product, the FDA

may conduct periodic inspections to determine compliance with both the FDA’s Quality System Regulation (“QSR”)

requirements and current medical device reporting regulations. Product approvals by the FDA can be withdrawn due to failure to

comply with regulatory standards or the occurrence of unforeseen problems following initial market clearance. The failure to comply

with regulatory standards or the discovery of previously unknown problems with a product or manufacturer could result in fines,

delays or suspensions of regulatory clearances, seizures or recalls of products (with the attendant expenses), the banning of

a particular device, an order to replace or refund the cost of any device previously manufactured or distributed, operating restrictions

and criminal prosecution, as well as decreased sales as a result of negative publicity and product liability claims.

must register annually with the FDA as a device manufacturer and, as a result, are subject to periodic FDA inspection for compliance

with the FDA’s QSR requirements that require us to adhere to certain extensive regulations. In addition, the federal Medical

Device Reporting regulations require us to provide information to the FDA whenever there is evidence that reasonably suggests

that a device may have caused or contributed to a death or serious injury or, if a malfunction were to occur, could cause or contribute

to a death or serious injury. We also must maintain certain certifications to sell products internationally, and we undergo periodic

inspections by notified bodies to obtain and maintain these certifications.

Advertising

and marketing of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission

and by state regulatory and enforcement authorities. Recently, promotional activities for FDA-regulated products of other companies

have been the subject of enforcement action brought under health care reimbursement laws and consumer protection statutes. Competitors

and others also can initiate litigation relating to advertising and/or marketing claims. If the FDA were to determine our promotional

or training materials constitute promotion of an unapproved or uncleared claim of use, it is possible we would need to modify

our training or promotional materials or be subject to regulatory or enforcement actions that could result in civil fines or criminal

penalties. Other federal, state or foreign enforcement authorities could also take similar action if they were to determine that

our promotional or training materials constitute promotion of an unapproved use, which could result in significant fines or penalties.

European

Union and Other Regions

European

Union rules require that medical products receive the right to affix the CE mark, demonstrating adherence to quality standards

and compliance with relevant European Union Medical Device Directives (“MDD”). Products that bear CE mark can be imported

to, sold or distributed within the European Union. We obtained clearance to use the CE mark on our products in April 2005. Renewal

of CE marking is required every five years, and our notified body performs an annual audit to ensure that we are in compliance

with all applicable regulations. We have maintained our CE marking in good standing since originally receiving it and most recently

renewed it in January 2020. The renewal of our MDD certificate will allow us to continue to CE mark and sell our SmartVest SQL

device, with no substantial changes, in the European Union until the certificate expires in May 2024. We are currently working

on finalizing updates to the quality system to achieve full compliance with Regulation (EU) 2017/745 (EU MDR) which came into

effect in May 2021. We also require all our distributors in the European Union and other regions to comply with their home country

regulations in our distributor agreements.

Federal

Physician Payments Sunshine Act

The

Federal Physician Payments Sunshine Act (Section 6002 of the PPACA) (the “Sunshine Act”) was adopted on February 1,

2013, to create transparency for the financial relationship between medical device companies and physicians and/or teaching hospitals

(covered recipients). In January 2021, the Sunshine Act was expanded to cover payments made to these additional covered recipients,

physician assistants, nurse practitioners, clinical nurse specialists, certified nurse anesthetists, and certified nurse midwives.

The Sunshine Act requires all manufacturers of drugs and medical devices to annually report to CMS any payments or any other “transfers

of value” made to any covered recipients, including but not limited to consulting fees, grants, clinical research support,

royalties, honoraria, meals, and value of long-term use (over 90 days) of evaluation equipment. This information is then posted

on a public website so that consumers can learn how much was paid to their physician by drug and medical device companies. The

Sunshine Act requires ongoing data collection and annual management and reporting by us and imposes civil penalties for manufacturers

that fail to report timely, accurately, or completely to CMS.

Fraud

and Abuse Laws

Federal

health care laws apply to the marketing of our products and when we or our customers submit claims for items or services that

are reimbursed under Medicare, Medicaid or other federally funded health care programs. The principal applicable federal laws

include:

There

are often similar state false claims, anti-kickback, and anti-self-referral and insurance laws that apply to state-funded Medicaid

and other health care programs and private third-party payers. In addition, the U.S. Foreign Corrupt Practices Act can be used

to prosecute companies in the U.S. for arrangements with physicians, or other parties outside the U.S. if the physician or party

is a government official of another country and the arrangement violates the law of that country. Enforcement of these regulations

has become increasingly stringent, particularly due to more prevalent use of the whistleblower provisions under the False Claims

Act, which allow a private individual to bring actions on behalf of the federal government alleging that the defendant has submitted

a false claim to the federal government and to share in any monetary recovery. If a governmental authority were to conclude that

we are not in compliance with applicable laws and regulations, we and our officers and employees could be subject to severe criminal

ELMD US Equity

ELMD · 10-K · period ended 2023-06-30

Item 1. Business.

ELMD US Equity☆

ELMD · 10-K · period ended 2023-06-30

Item 1. Business.

ELMD US Equity